US poverty rate, actual and simulated, 1959 – 2012 (graph)

One of the points Thomas Piketty makes in his new book is that mainstream economists enshrined as “laws” of capitalist development certain “facts” that only had relevance during the immediate postwar decades.

These so-called laws included constant capital and labor shares and declining inequality. We now know they were no more than artifacts of a particular period of capitalist development for some countries (including the United States). Things began to change radically in the mid- to late-1970s for those same countries (again, including the United States).

The same is true, as it turns out, of the relationship between economic growth and poverty. As the Economic Policy Institute (pdf) explains,

Economic growth used to be associated with significant poverty reductions, but since the 1970s the benefits of aggregate growth for lowering poverty have largely stalled. The figure compares the actual poverty rate with a simulated poverty rate based on a model of the statistical relationship between growth in per capita gross domestic product (GDP) and poverty that prevailed between 1959 and 1973. The model forecasts poverty quite accurately through the mid-1970s. Since then, the actual poverty rate stopped falling and has instead fluctuated cyclically within 4 percentage points above its trough in 1973.

However, the simulated poverty rate shows that if the relationship between per capita GDP growth and poverty that prevailed from 1959 to 1973 (wherein poverty dropped as the country, on average, got richer) had held, the poverty rate would have fallen to zero in the mid-1980s. Therefore, broadly shared prosperity could have led to a near eradication of poverty in the United States, but it did not.

So, the next time someone exclaims that the solution to poverty is more economic growth, explain to them that trickle-down economics, even if it was valid grosso modo for the immediate postwar period, has not worked for those at the bottom of the distribution of income for many decades.

And it certainly doesn’t

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Outsourcing and automation have greatly reduced the bargaining power of domestic labor in the West and to the extent they were financed with loans from the government-backed credit cartel, the banking system, they were financed with the workers own (legally) stolen purchasing power.

I wonder if distortions in conventional measures of poverty (notably their propensity for underestimating actual poverty) have changed over this time period as well, corresponding with the structural economic changes accounting for the modified relation between growth and poverty reduction, perhaps exaggerating the divergence even further.

Poverty rate can fall only when resources are carefully used to increase economic production and wealth accumulation. The abandonment in 1971 of the discipline of the “gold standard” allowed careless use of resources through limitless debt creation, for wars, for boondoggles, for over-consumption etc.

It is fine to use debt carefully for economic growth, which, however, has been in secular decline in the US due to careless debt creation and over-consumption:

The enormous US national debt represents mostly domestic savings already spent by borrowers. The accumulated capital in aggregate or national wealth has been substantially depleted.

If the savers lose some or all of their savings, through inflation, debt defaults, confiscation or unmet government promises, and are dependent on their savings to live (e.g. in their retirement), then they will join the ranks of the poor and US poverty rate will rise.

Economists like Krugman, MMTers are laughable, when they believe the level of fiat money or debt doesn’t matter because “we owe it to ourselves”. Debt and inflation are both wealth destruction and wealth transfer mechanisms.

F. Beard

June 11, 2014 at 3:55 pm

You’re a fool if you think a rare substance can enforce justice. Whose rare substance, for example? Why not my toe-nail clippings or yours for instance? Why should gold-rich countries or individuals be de jure rich in every thing else too while those not so lucky have to serve them?

But let;’s have true liberty in private money creation with government privilege for none. Surely if gold is the best private money form it need fear no genuine competitio?. Or do you merely wish to have government enforce a different form of tyranny?

Herb Wiseman

June 11, 2014 at 8:36 pm

The history of gold money is rife with problems. It is not a good form of money.

Poverty rate can also fall by redefining it (see eg Herman Daly on GPI) and also by taking unearned income from some (eg the so-called ‘1%’ with their income derived from drug laundering money, tax evasion, ecological destruction, gentrification, etc.) and paying it to those who actually made any income possible (see also ‘reperations’).
Libertarians for example seem to be, by my metric, to be intellectually impoverished or impaired. So, they may need to re-allocate resources so they can compete and/or grow. (though that is unlikely—as Max Born said (born’s rule of quantum theory, still an issue of research) in general you have to wait for old heads to pass off before you can get a new paradigm.

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